Regulation, including disclosure requirements, accounting rules, and tax policies influence decision making. This study examines the impact of the exclusion of the chief financial officer (CFO) from the deduction limitation of Section 162(m) of the Internal Revenue Code, an exclusion that was triggered by the 2006 Securities and Exchange Commission's change in compensation disclosure requirements. We empirically examine this exclusion to provide causal evidence that tax policy and regulatory actions influence executive compensation. In our study we show that the exclusion of the CFO from the Section 162(m) limit on the deduction of nonperformance-based compensation led firms to increase CFO nonperformance-based compensation. More surprisingly, we found a decrease in CFO total compensation, which we attribute to the decreased riskiness of CFO compensation. We contribute to the broader executive compensation literature/debate by providing empirical evidence concerning how regulation, such as tax policy, impacts compensation contract design.

This paper explores the under-researched...

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